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Save Some Green


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April, 2011 Thursday Thursday Presentation
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Save Some Green

  1. 1. Save Some &quot;Green&quot; in 2011 & Beyond <ul><li>Lenny S. Gant, CPA </li></ul><ul><li>Byron T. Largen, CPA </li></ul><ul><li>Stephen M. Lukinovich, CPA/PFS, CVA </li></ul><ul><li>James G. Oiler, PE </li></ul><ul><li>Stites & Harbison PLLC: Thirsty Thursday </li></ul><ul><li>March 24, 2011 </li></ul>
  2. 2. Objectives <ul><li>Introduction to Green Construction Tax Incentives </li></ul><ul><li>Construction Tax Update </li></ul><ul><li>Real Estate Tax Planning </li></ul><ul><li>After Tax Cash Flow Planning </li></ul>
  3. 3. Introduction to Green Construction Tax Incentives
  4. 4. Why Go Green? <ul><li>Energy consumption </li></ul><ul><ul><li>Buildings represent 39% of US primary energy use </li></ul></ul><ul><ul><li>Buildings account for 39% of ALL CO2 emissions </li></ul></ul><ul><li>Electricity consumption </li></ul><ul><ul><li>Buildings represent 70% of US consumption </li></ul></ul><ul><li>Water use </li></ul><ul><ul><li>Buildings use 12% of ALL potable water </li></ul></ul><ul><li>Use of materials </li></ul><ul><ul><li>Buildings represent 40% of raw materials GLOBALLY </li></ul></ul><ul><li>Waste </li></ul><ul><ul><li>136 million tons of building related construction and demolition debris </li></ul></ul><ul><ul><li>210 million tons of MSW </li></ul></ul>
  5. 5. Congress Extends Energy Tax Incentives: § 179D Introduced & Extended <ul><li>Energy Efficient Commercial Building Deduction </li></ul><ul><ul><li>EPAct (Energy Policy Act) </li></ul></ul><ul><li>Section 179D deduction adopted in 2005 and extended to 12/31/2013 </li></ul>
  6. 6. President Announcement - Proposal <ul><li>February 2011 - Obama proposed </li></ul><ul><li>Tax credit for retrofit building </li></ul><ul><ul><li>Instead of deduction </li></ul></ul><ul><li>New code Section 179F </li></ul><ul><ul><li>In proposal stage </li></ul></ul><ul><li>Increase energy efficiency of older properties </li></ul>
  7. 7. Section 179D Guidance <ul><li>Energy efficient commercial building deduction </li></ul><ul><ul><li>Owner or lessee of commercial building located in the United States </li></ul></ul><ul><ul><ul><li>Installs energy efficient property </li></ul></ul></ul><ul><ul><ul><ul><li>Lighting - 60₵/sq foot </li></ul></ul></ul></ul><ul><ul><ul><ul><li>HVAC - 60₵/sq foot </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Building Envelope - 60₵/sq foot </li></ul></ul></ul></ul><ul><ul><ul><li>Obtain a certification </li></ul></ul></ul><ul><ul><ul><li>Inspected and tested by “qualified” individuals </li></ul></ul></ul><ul><li>NOTE: Rental apartment buildings 4 stories or more; &quot;Primary Designers” of government buildings </li></ul>
  8. 8. What’s It Worth? Note: For government buildings, these deductions are allocated to the “primary designer.” Section 179D deductions cannot be greater than the actual cost incurred.
  9. 9. First Movers <ul><li>Retailers Energy is major cost </li></ul><ul><li>Distribution Centers Major growth market </li></ul><ul><li>Hotels Meet ASHRAE 2004 </li></ul><ul><li>Parking Garages Large facilities </li></ul><ul><li>Industrial Facilities Large facilities </li></ul><ul><li>Office Buildings More states enact ASHRAE 2004 </li></ul><ul><li>Apartments Must be at least 4 stories </li></ul>
  10. 10. § 179D Interim Lighting Rules <ul><li>Meet w/ft 2 </li></ul><ul><li>Additional requirements: </li></ul><ul><ul><li>Bi-level Switching </li></ul></ul><ul><ul><li>Meet ASHRAE 90.1 requirements </li></ul></ul><ul><ul><li>Meet IESNA minimum light levels </li></ul></ul>
  11. 11. Section 179D Lookback Rules <ul><li>Announced by IRS in December 2010 </li></ul><ul><li>Applies for prior year missed §179D </li></ul><ul><ul><li>Now available for more than 3 previous tax years </li></ul></ul><ul><li>Do not amend prior-year tax returns </li></ul><ul><li>Reflect prior year § 179D deductions missed on current year tax return - Form 3115, § 481(a) full year deduction - Federal, AMT and State </li></ul>
  12. 12. <ul><li>Federal tax credits for installation on commercial property </li></ul><ul><ul><li>30% tax credit for solar fuel cells and small wind mills </li></ul></ul><ul><ul><li>10% tax credit for geothermal units </li></ul></ul><ul><ul><li>Tax credits are available for eligible systems placed in service by December 31, 2015 </li></ul></ul><ul><ul><li>Reduce tax basis in year property is placed in service by 1/2 the tax credit </li></ul></ul>Federal Energy Investment Tax Credits
  13. 13. Construction Tax Update
  14. 14. Primary Designer - Contractors Government Buildings <ul><li>New or retrofit? </li></ul><ul><li>Who is considered primary designer? </li></ul><ul><ul><li>Architects, Engineers, etc. </li></ul></ul><ul><li>Which jobs qualify for this free deduction? </li></ul><ul><li>How do primary designers achieve this benefit? </li></ul><ul><li>Will I get audited? </li></ul><ul><li>Does the property need to be certified? </li></ul><ul><li>Who can certify the property? </li></ul>
  15. 15. Home Builder Tax Credits: Federal & Kentucky <ul><li>Effective 1/1/06 - 12/31/11 $2,000 Federal tax credit </li></ul><ul><ul><li>Home Builder energy efficient home </li></ul></ul><ul><li>Need certification </li></ul><ul><li>Applies to residential homes, not rental properties or commercial properties </li></ul><ul><li>Builder receives the tax credit - limited to AMT </li></ul><ul><li>Beginning 1/1/2009 $850 Kentucky tax credit for Home Builder </li></ul><ul><ul><li>Limited to LLET - upsetting </li></ul></ul>
  16. 16. Proposed H.R. 6097: Provisions <ul><li>Increase completed-contract threshold from $10 million to $40 million </li></ul><ul><li>Index threshold going forward </li></ul><ul><li>Eliminate AMT adjustment for long-term contracts </li></ul><ul><li>Threshold: Three-year average of gross receipts </li></ul>
  17. 17. Proposed H.R. 6097: Impact <ul><li>Enables more contractors to report long-term contracts on method other than percentage-of- completion </li></ul><ul><li>Eliminates look-back method for contractors under $40 million </li></ul><ul><li>Estimated to impact 95% of contactors </li></ul>
  18. 18. 3% Government Withholding Tax <ul><li>Effective 1/1/2012, current law, requires 3 (three) percent Federal withholding tax on certain payments... </li></ul><ul><li>by the federal government and every state government (including political subdivisions and instrumentalities)… </li></ul><ul><li>to persons providing property or services, regardless of whether the government entity making the payment is the recipient of the property or services </li></ul>
  19. 19. Real Estate Tax Planning
  20. 20. Federal & Kentucky Real Estate Tax Incentives <ul><li>2010 Tax Law – Federal & Kentucky </li></ul><ul><ul><li>Through 12/31/2012 </li></ul></ul><ul><ul><li>Future Federal tax law effective 1/1/2013? </li></ul></ul>
  21. 21. Bonus & Section 179 for Real Estate <ul><li>50% bonus depreciation for QLHI property - reinstated effective 1/1/2010 - 9/8/2010; 100% bonus 9/9/2010 - 12/31/2011; 50% Bonus QLHI 1/1/2012 - 12/31/2012 </li></ul><ul><li>Doubling Section 179 - $500,000 for 2010 - 2011 </li></ul><ul><ul><li>Phase-out threshold increased to: $2M - $2.5M </li></ul></ul><ul><ul><li>1/1/2012 - 12/31/2012 §179 $250,000 </li></ul></ul><ul><li>New: qualified real property eligible for special §179 expenses - up to $250,000 included in $500,000 annual limit: 1/1/2010 - 12/31/2011 </li></ul><ul><li>Not available in Kentucky </li></ul>
  22. 22. $250,000 §179 Qualified Real Property Deduction <ul><li>Qualified Leasehold Improvement Property </li></ul><ul><ul><li>Watch related party rules </li></ul></ul><ul><ul><li>3 year old or older property </li></ul></ul><ul><li>Qualified Restaurant Property (not eligible for bonus) </li></ul><ul><li>Qualified Retail Property (not eligible for bonus) </li></ul><ul><li>Not available in Kentucky </li></ul>
  23. 23. 50% Bonus Depreciation <ul><li>Qualifying Property - new or first use </li></ul><ul><ul><li>MACRS property with a recovery period of 20 years or less – 5 yr, 7 yr, 15 yr land improvements </li></ul></ul><ul><ul><li>Computer software </li></ul></ul><ul><ul><li>Qualified leasehold improvement property – normally 39 year property </li></ul></ul><ul><ul><li>Not available for Kentucky </li></ul></ul>28
  24. 24. Bonus or No Bonus? 29
  25. 25. Rental Real Estate: Tax Treatment <ul><li>Tax rules for activities involving rental real property </li></ul><ul><ul><li>Passive activity - Under §469, passive activity losses are limited to passive activity income </li></ul></ul><ul><ul><li>Active participation - Up to $25,000/year of rental losses against non-passive income </li></ul></ul><ul><ul><ul><li>Taxpayer and spouse own at least 10% of rental property </li></ul></ul></ul><ul><ul><ul><li>Substantial involvement in managing the property </li></ul></ul></ul><ul><ul><ul><li>AGI phase out starting at $100,000 through $150,000 </li></ul></ul></ul>
  26. 26. Related Property: Other Limitations <ul><li>Related party activities involving passive rental real estate property </li></ul><ul><ul><li>Passive activity </li></ul></ul><ul><ul><ul><li>Net income from rental property between related parties is generally considered non-passive ; cannot use income to offset other passive losses </li></ul></ul></ul><ul><ul><ul><li>Net loss from rental properties between related parties is subject to §469, subject to normal passive loss rules </li></ul></ul></ul>
  27. 27. <ul><li>Real estate professional status </li></ul><ul><ul><li>Permits treating passive rental losses as ordinary, non-passive losses </li></ul></ul><ul><ul><li>Need 5% ownership of real estate activities </li></ul></ul><ul><ul><li>Can only aggregate rental real estate activities </li></ul></ul><ul><li>Economic unit status </li></ul><ul><ul><li>Grouping is an opportunity for operating companies with related rental real estate activity(ies) </li></ul></ul><ul><ul><li>Related activity treated as “one unit” for tax treatment purposes </li></ul></ul>Converting Passive Rental Real Estate Losses to Non-passive
  28. 28. Kentucky Energy Tax Credits <ul><li>Business energy efficient tax credit, up to $1,000 </li></ul><ul><li>Kentucky commercial property owners 30% tax credit for installing certain energy improvements: </li></ul><ul><ul><li>Energy efficient interior lighting system - $500 maximum </li></ul></ul><ul><ul><li>Energy efficient heating, cooling, ventilation or hot water systems - $500 maximum </li></ul></ul><ul><ul><li>The total maximum commercial tax credit is $1,000 per taxpayer. Any unused tax credits can be carried over one year. </li></ul></ul><ul><ul><li>Commercial properties for this purpose do not include residential rental units </li></ul></ul><ul><li>Effective 1/1/2009 </li></ul>
  29. 29. 1/1/2013, Federal Tax Law? <ul><li>Top income tax rates increase, effective 1/1/2013? </li></ul><ul><ul><li>33% to 35% </li></ul></ul><ul><ul><li>36% to 39.6% </li></ul></ul><ul><li>Long-term capital gain tax rate, effective 1/1/2013? </li></ul><ul><ul><li>15% to 20% </li></ul></ul><ul><li>Earnings tax > $250,000 - Medicare tax increase </li></ul><ul><li>Enhance Section 179D - deduction vs. credit </li></ul>
  30. 30. After Tax Cash Flow Planning: Cost Segregation Energy Efficient Design
  31. 31. <ul><li>Investor’s point of view </li></ul><ul><ul><li>What is it? </li></ul></ul><ul><ul><li>History </li></ul></ul><ul><ul><li>What is included? </li></ul></ul><ul><ul><li>Why do it? </li></ul></ul><ul><ul><li>Applied to what? </li></ul></ul><ul><ul><li>Case study </li></ul></ul><ul><ul><li>Retrofit example - lighting </li></ul></ul><ul><ul><li>Energy Study </li></ul></ul>Cost Segregation
  32. 32. Cost Segregation
  33. 33. <ul><li>What is it? </li></ul><ul><ul><li>Engineering replication/analysis of real estate cost to identify short-lived assets </li></ul></ul><ul><li>History </li></ul><ul><ul><li>1997 HCA court case </li></ul></ul><ul><ul><li>2004 IRS guidelines </li></ul></ul><ul><li>What is included? </li></ul><ul><ul><li>Hard costs </li></ul></ul><ul><ul><li>Soft costs </li></ul></ul>Cost Segregation: Investor’s Point of View
  34. 34. <ul><li>Why do it? </li></ul><ul><ul><li>Cash flow (non-cash depreciation expense taken sooner) </li></ul></ul><ul><ul><li>Asset management (some restrictions and limitations) </li></ul></ul><ul><ul><ul><li>HVAC units, lighting fixtures, shingle roof </li></ul></ul></ul><ul><li>Note: Must know the “single” asset cost to write off </li></ul>Cost Segregation: Investor’s Point of View
  35. 35. <ul><li>Actual case study </li></ul><ul><ul><li>20,000 sq. ft. office building – energy efficient design </li></ul></ul>Cost Segregation: Investor’s Point of View
  36. 36. Case Study
  37. 37. Case Study
  38. 38. Energy Efficient Design <ul><li>Retrofit example </li></ul><ul><ul><li>There are certain limitations for cost segregation inclusion—level of detail </li></ul></ul><ul><ul><li>Without cost segregation </li></ul></ul><ul><ul><ul><li>No expense write-off upon disposal/replacement </li></ul></ul></ul><ul><ul><li>$200,000 Light Fixtures </li></ul></ul><ul><ul><ul><li>10 years old </li></ul></ul></ul><ul><ul><ul><li>$150,000 non-cash expense taken upon retrofit with new fixtures </li></ul></ul></ul>
  39. 39. Energy Efficient Design
  40. 40. Case Study
  41. 41. Cost Segregation Combined with Energy Efficient Design: Case Study <ul><li>TYPE: Office Building </li></ul><ul><li>SIZE: 20,000± Sq. Ft. </li></ul><ul><li>IN-SERVICE DATE: June 26, 2009 </li></ul><ul><li>NEW PROPERTY </li></ul>SUMMARY: ASSUMPTIONS: 41% Combined Federal & State Income Tax Rate 7% Discount Rate (numbers rounded and some estimates)
  42. 42. Questions?
  43. 43. IRS Circular 230 Disclosure <ul><li>As a result of perceived abuses, the Treasury has recently promulgated Regulations for practice before the IRS. These Circular 230 regulations require all accountants to provide extensive disclosure when providing certain written tax communications to clients.  In order to comply with our obligations under these Regulations, we would like to inform you that any advice given in this presentation, including any attachments, cannot be used to avoid penalties which the IRS might impose, because we have not included all of the information required by Circular 230, nor have we performed services that rise to this level of assurance. </li></ul>
  44. 44. Thank You! Lenny S. Gant [email_address] Byron T. Largen [email_address] Stephen M. Lukinovich [email_address] Jim G. Oiler [email_address] 502.749.1900